Lending rates surge to 12.43% on rising Treasury bill rates
In January, the highest interest rate was 11.89%.
The bank lending rates for February have increased to 12.43% due to government borrowing through Treasury bills and bonds at higher interest rates.
This increase follows months of rising Treasury bill rates, with the Six-Month Moving Average Rate (SMART) reaching 8.68% in January. This benchmark rate, along with a permitted 3.75% margin for banks, sets the base for loan interest rates.
For consumer loans, an additional 1% margin can be applied, bringing the maximum interest rate to 13.43%.
The central bank has hiked policy rates several times to make money costlier in a bid to control inflation, which has remained over 9% since March of last year.
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In the last fiscal year, the government borrowed inflation-fuelling high-powered money from the Bangladesh Bank to meet its budget deficit. However, this fiscal year, it is borrowing through Treasury bills and bonds from commercial banks.
The managing director of a private bank explained that the government's high borrowing from banks is causing an increase in Treasury bills and bond rates.
However, he pointed out that, due to pre-election uncertainty and the economic slowdown, many businesses slowed borrowing. After the election, many businessmen will now seek loans. However, their investment may be hampered by the gradual rise in interest rates.
He said due to the high demand for loans by the government, banks are also asking for higher rates in the auction. As a result, the credit flow to the private sector has decreased significantly. Meanwhile, the central bank also wants to reduce the flow of private sector loans to control inflation.
In July, the SMART was at 7.10%, and by September, it had risen to 7.20%. In October, an additional 0.20 basis point increase pushed it to 7.40%. In December, it had risen to 8.14%. It also increased to 8.68% in January.
A senior Bangladesh Bank official said, "The central bank is taking steps to control inflation by raising interest rates. The government is also borrowing at higher rates to absorb funds from the market."
On 28 January this year, the government borrowed Tk1,800 crore from 91-Day Treasury Bills at 11.35%, and for 182-Day and 364-Day Treasury Bills, the government accepted Tk6,214 crore. The rates ranged from 11.40% to 11.60%.
In that auction, the government had a target to raise Tk7,425 crore. However, banks offered Tk9,429 crore in the auction that day.
The head of the money market at a bank told TBS that banks are receiving about 11.50% interest by lending to the government. On the other hand, they can provide loans to customers at a maximum interest rate of 12%, but they will have to worry about getting this money back.
Furthermore, when banks lend to the government, there is no risk, and when necessary, they can borrow from the central bank through repo. So banks are more interested in this avenue.
However, the interest rate for 91-day Treasury bills climbed from 7.21% on 12 September.
BB wants to hike the lending rate further
Mezbaul Haque, spokesperson for the Bangladesh Bank, said there will be a tight situation for the next few months due to the increase in the policy rate; that is, the repo rate may increase further.
"We have taken several steps to control inflation. Policy rates may increase further if necessary in the future," he said while speaking to journalists on Wednesday.
The central bank has revised all money supply targets downward. Notably, the private sector credit growth target has been reduced to 10% for June, down from the previous 11%. Also, the broad money supply has been trimmed to 9.7% from the earlier target of 10%.
The average credit growth target for the private sector during the January-June period of the current fiscal year has been set at below 10%, whereas there was around 12% growth during the corresponding period in the previous fiscal year.
The Bangladesh Bank is determined to persist with its stringent monetary policy until point-to-point inflation recedes to the 6% level, with less emphasis placed on fostering economic growth.
"We do not have any headaches about growth; inflation is our main target," said Bangladesh Bank Governor Abdur Rouf Talukder while unveiling the new policy.
Besides, Bangladesh Bank has increased its policy rate, i.e., lending rate to banks, by about 200 basis points in the last three months. Currently, this rate is 8%.
Call money rates increasing
Banks engage in transactions in the interbank call money market to meet temporary liquidity needs. The overnight weighted average rate of the continuous call money market has been rising since early October.
On 28 January, the average call money rate surged to 9.60%, marking the highest point in the last 12 years due to recent policy rate hikes by the Bangladesh Bank.
Bangladesh Bank data show that banks borrowed Tk3,251 crore from the call money market on 28 January. This demand pushed the weighted average rate to a staggering 9.60%, marking the highest since 2013.
